With auto-enrolment approaching, HVP asked Robert Burgon from Plumbing Pensions what the changes mean to those in the plumbing and heating sector
Later this year, the government is introducing automatic enrolment to the UK’s pension market.
Concerned that many employees are reluctant to voluntarily contribute towards their own pensions, the government believes automatic enrolment will be a “new way to save”, encouraging more people to take action to ensure they have sufficient income once they retire.
Starting in October this year, all employees aged between 22 and the state pension age who earn between £7,336 and £33,540 a year will automatically be enrolled into a qualifying pensions scheme.
This can be the company’s own scheme if it meets certain criteria, or if not, staff will be automatically enrolled into the National Employment Savings Trust (NEST) scheme, which is being set up by government specifically for this purpose.
Employees will still have the choice to opt-out of the pensions scheme if they wish to do so, but the employer will have to reintroduce them to the scheme at least once every three years.
Robert Burgon, secretary and pensions manager at Plumbing Pensions, believes that automatic enrolment “should be seen as an opportunity, not a threat.
“The concept of everybody having to join a pension scheme is something we’re quite familiar with, because when the plumbing industry pension scheme was set up back in the mid 1970s, it was effectively done on that basis,” he explained.
While there was no government legislation in place then to encourage people working in the plumbing industry to join a pension scheme, the reaction to the launch was positive.
Since then, however, a lot has happened to change the country’s perception of pensions in a negative way, and Burgon says there are now “quite a lot fewer” employers participating in the Plumbing & Mechanical Services (UK) Industry Pension Scheme, which is operated by Plumbing Pensions, than there were in 1980.
“When personal pensions were introduced in the late 1980s, employers lost the right to insist that their employees were members of a particular pension scheme,” he explained. “Also, self-employed people aren’t eligible to participate in our type of scheme, and there’s been a huge increase in the number of self-employed people working in the plumbing industry since the 1970s.”
What type of pension?
Pensions have hit the headlines in recent weeks, with the public sector taking strike action over plans to alter the terms of their pensions by increasing staff contributions, and converting their existing final salary schemes to cheaper, career-average pensions.
The Plumbing & Mechanical Services (UK) Industry Pension Scheme already operates a defined benefits scheme, where the pension is based on an employee’s average earnings across their career.
“I would argue that, in our industry, a career average scheme is fairer, because the work is so physical that they don’t generally get their top earnings just before they retire. Our scheme is based on all their earnings across their career.”
The scheme works on an 80th accrual rate, which means that if the employee earns £10,000 this year, they will be allocated a pension credit equal to 1/80th of that amount.
If, the following year, the employee earns £15,000, then they’ll be allocated a pension credit equal to 1/80th of that amount. All these credits are added together and bonused, so that they grow in line with price inflation.
Higher benefit levels are also available for senior staff and directors, who can pay more for an accrual rate of up to 1/50th, and will then get higher benefits in return.
This type of scheme is in contrast to defined contribution schemes, where Burgon said the amount of benefit available depends on the state of the investment markets at the time the employee wants to retire.
“I feel very sorry for people who have had to retire in the last two or three years, when the markets have been awful,” said Burgon.
“In a defined benefit scheme, there’s a much higher degree of certainty and awareness about what the pension is going to be, and it’s less risky as well.”
With the public sector in uproar over changes to their pension schemes, Burgon said there has been a lot of “sensationalism and misinformation” in the news.
“Career average schemes may not work for the most senior civil servants, but for the vast majority of people they do work – I can understand why they’re so upset about losing the big commitment, but I don’t think it’s a total disaster.”
The new automatic enrolment legislation will enter employees into schemes where both the employer and the employee contributes a percentage of the employee’s salary to the pension every month.
Burgon acknowledged that this is likely to be unpopular to many employees who are already struggling with rising household bills and stagnant wages.
“It’s bad timing to be introducing this new legislation with the financial markets in such a bad state,” he said. “No-one wants to have to consider additional costs at the moment, but we have to do something to tackle the pensions deficit.
“We’re all living longer, but no-one wants to work much longer than they already do. Some people now will live for 30 years after they retire – how are they going to fund their lifestyle for that long? What if there isn’t a state pension at all in 20 years’ time? Auto-enrolment will help people to realise that they need to do something.”
The level of contributions for the new scheme has been set at 8%, with 3% contributed by the employee. Even this figure will only be reached after the scheme has been running for a number of years.
While many people – companies and staff alike – might initially baulk at having to find this money to set aside, Burgon actually believes this figure is very low.
“People who understand pensions know that a contribution of 8% will not deliver anything like the kind of pension that’s going to keep people in a nice environment during their retirement – which is what it’s all about.”
Burgon also believes that, in time, this minimum contribution level will be increased.
In Australia, where similar legislation has been in place for some time, the contribution is now being increased to 12%, which Burgon described as “far more meaningful”.
For those employers who are concerned about having to find the extra money to meet their contribution obligations, Burgon pointed out that offering employees a comprehensive pension scheme could, in fact, be a real retention tool to help companies keep key
members of staff.
“I heard one story of a company who lost a valued supervisor because a rival firm was offering a 50p increase on his hourly rate. It was only after he’d moved that the employee realised his new company didn’t operate a pension scheme. Three months later, he returned to his old job.”
The NEST scheme (or its equivalent) that government has established specifies a minimum 8% pension contribution must be made, but no other benefits are compulsory.
The Plumbing & Mechanical Services (UK) Industry Pension Scheme qualifies as a NEST equivalent, with basic contribution levels at 3.75% of gross earnings for employees and 7.5% for employers. In real terms, due to National Insurance savings and tax relief on paid contributions, the net contribution rate can be reduced to less than 2% for employees, and less than 3.5% for employers.
Burgon said that, in addition to this, it also offers other benefits to its members that go beyond the legal minimum.
On retirement, members are given the option to ‘give up’ up to 25% of the pension value in return for a lump sum payment, all or part of which will be tax free. The scheme also offers comprehensive death in service cover.
Burgon also said that the scheme makes no deductions from contributions and applies no annual management charges to members’ accrued pension, maximising the amount that goes toward the pension value on retirement.
“We’re very proud of the scheme,” Burgon concluded, “which we believe is still the only comprehensive pension scheme in the UK construction industry. There are other schemes in the sector, both in the construction and building services side, but none of them offer the complete benefits that we do.”